June 2010 — (Source: NDIA) — Just as the Defense Department and its suppliers worry about dependence on foreign oil, they also must be concerned about growing needs — and potentially declining supplies — of rare earth metals.

Rare earth materials are used in commercial and military systems for their magnetic and other unique properties. They include rare earth ores, oxides, metals and alloys.

According to a recent Government Accountability Office report, worldwide availability of these materials may be limited to a few overseas sources, primarily China. GAO noted that the Defense Department is in the early stages of assessing its dependency on rare earth materials and is planning to complete a study by September 2010.

A potential disruption of supplies of rare earth metals would not only affect the U.S. military’s ability to produce high-end weapons, but would also jeopardize the nation’s adoption of green-energy technologies.

The presence of globally competitive and diverse supply chains would help to eliminate this vulnerability.

The conventional wisdom in the industry is that China will continue to manage rare earth material production and exports to leverage its strategic supply position to create downstream manufacturing industries and jobs in China. That nation also is seeking to meet its own internal demand for rare earth enabled products such as electric vehicles, wind turbines and compact florescent lamps.

Global demand for rare earth products for green energy is forecast to grow at double-digit rates. Already the world’s largest market for automobiles and wind turbines (the two highest volume applications for rare earth magnets), China will continue to consume an ever-increasing percentage of its output. China currently consumes 80 percent of rare earth material supplies.

Eventually, China will be faced with the decision of whether to expand rare earth production to meet global demand.

Industry insiders and investors are betting China will continue its current policies of limiting production and exports.

Congress mandated the GAO study out of concerns about the defense supplier base. The House Committee on Science and Technology’s subcommittee on investigations and oversight also is looking into this issue. The Senate Committee on Energy and Natural Resources is just beginning to investigate. Last year, the Department of Commerce sponsored an interagency roundtable with industry looking at rare earth technology supply issues.

Among major manufacturers, the awareness and apparent level of concern over these issues remain generally low. They believe that market forces will work things out.

Nothing could be further from the truth. Equipment manufacturers’ support is crucial to prevent a future crisis.

Other developed countries have come to recognize the significance and depth of the problem sooner than the United States, and are taking measures to deal with it. Japan, through its quasi-governmental entity, JOGMEC, is finalizing plans to assist Japanese companies to finance ownership positions in foreign rare earth properties, including a reserve in Kazakhstan.

In January came news that the Korean government has created The Korea Institute of Industrial Technology (KITECH) in part to address these issues. “It is critical that we secure rare [earth] metals as they are essential for the nation’s high-tech and green industries,’’ KITECH President Na Kyoung-hoan told The Korea Times.

South Korea will reportedly spend $257 billion during the next nine years to secure and refine rare metals. It plans to boost the number of local rare metal manufacturers from 25 to 100, build a dedicated regional industrial cluster, and establish a specialized merger and acquisition fund to help them buy foreign firms.

On the upstream end of the supply chain, it can take eight to 10 years and at least $500 million to bring a newly discovered rare earth resource into production. New production in the United States is scheduled to begin in 2012. Players in this sector include Molycorp Minerals LLC, which has an existing mine and processing facility in California, and Australia’s Lynas Corp.

The technology gap that was created when rare earth technology manufacturing and innovation moved offshore will have to be closed. Global collaboration of stakeholders from the United States, Europe, Japan, Korea and other interested nations, including China, should be encouraged. Simultaneously, formal business relationships need to be forged from among interested firms in the private sector.

Today’s tight capital market is becoming an enormous impediment for potential investors. The interest rates and terms being dictated for loans are particularly onerous and would add significantly to the commercial risk and perhaps even kill many initiatives outright. Government loan guarantees would solve this problem. Mining projects in general lack adequate funding. Only one mining project was financed in the United States last year.

The loans needed to move the process along must be backed by compelling business and financial plans. This is where manufacturers’ support is crucial, especially in the defense industry. Defense firms need to do a thorough analysis of their supply chains and identify rare earth related vulnerabilities. They should be ready to support initiatives within their supply chains that will promote global competitiveness and diversity of supply.